Ryder Truck Rental, Inc. v. UTF Carriers, Inc.

• Decision Date: 19 February 1992
• Docket Number: Civ. A. No. 89-0038-C.
• Citation: Ryder Truck Rental, Inc. v. UTF Carriers, Inc., 790 F.Supp. 637 (W.D. Va. 1992)
• Parties: RYDER TRUCK RENTAL, INC., Plaintiff, v. UTF CARRIERS, INC., et al., Defendant.
• Court: U.S. District Court — Western District of Virginia

790 F. Supp. 637

RYDER TRUCK RENTAL, INC., Plaintiff, v. UTF CARRIERS, INC., et al., Defendant.

Civ. A. No. 89-0038-C.

United States District Court, W.D. Virginia, Charlottesville Division.

February 19, 1992.

Nathan H. Smith, Eric S. Jensen, Smith & Jensen, Richmond, Va., for Ryder Truck Rental, Inc.

Elizabeth P. Coughter, Bruce D. Rasmussen, Kevin W. Ryan, Michie, Hamlett, Lowry, Rasmussen & Tweel, Charlottesville, Va., for UTF Carriers, Inc.

Colin J.S. Thomas, Jr., Timberlake, Smith, Thomas & Moses, Staunton, Va., for Nat. Union Fire Ins. Co.

MEMORANDUM OPINION

MICHAEL, District Judge.

This matter comes before the Court on cross motions for summary judgment in a breach of contract action brought by Ryder Truck Rental, Inc. (Ryder) against defendants, UTF Carriers, Inc. (UTF) and National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National Union) for their breaches of separate contracts. Also before the Court is a motion to amend the complaint by adding a tort claim against National Union for bad faith refusal to insure, seeking both compensatory and punitive damages. This Court has jurisdiction based upon diversity of citizenship.

I. Background

The contract claims are an outgrowth of a personal injury action that arose from an accident on November 11, 1986, near Scottsville, Virginia, involving a driver furnished to UTF in connection with UTF's lease of a tractor from Ryder under a contractor operating agreement. In the personal injury action brought by an injured motorist, the driver of the tractor trailer, Norwin Darthard (Darthard), and UTF were the original defendants. Subsequently the corporate predecessor to Ryder¹ was added as a defendant. The personal injury case was settled in 1989, with Ryder and UTF each paying $265,000 to the plaintiff.

In October, 1989, Ryder filed this action against UTF alleging that UTF had breached the contractor operating agreement by failing to insure Ryder, and against National Union alleging that it had breached its insurance contract by failing to indemnify or defend Ryder. Ryder filed motions for summary judgment against both defendants, and subsequently also filed an Amended Complaint stating that it had determined through discovery of an insurance broker that it was in fact covered under two National Union insurance policies dated December 8, 1986, and a binder effective from April 30, 1986.² This revelation supported Count II of the Amended Complaint which alleged that National Union tortiously breached the insurance contracts by its bad faith refusal to defend Ryder and Darthard. In response, National Union filed an Amended Answer admitting liability for the breach of contract, and raising as a defense the fact that it had already reimbursed Ryder for the $265,000 Ryder contributed to the settlement of the underlying personal injury action. In addition, UTF moved for summary judgment against Ryder, arguing that because Ryder was in fact covered, UTF did not breach its contract to obtain insurance for Ryder.

II. The Motions for Summary Judgment

The Court finds that in light of Ryder's admission in its pleadings that it was covered in accordance with the contractor operating agreement, and National Union's admission that it breached its insurance contract, no genuine dispute as to any material fact remains with respect to Ryder's claims against UTF or National Union for breach of contract. Accordingly UTF is entitled to judgment against Ryder as a matter of law, and its motion for summary judgment against Ryder shall be granted, and Ryder's motion for summary judgment against UTF shall be denied. Also, as a matter of law Ryder is entitled to judgment against National Union for breach of contract and therefore its motion for summary judgment against National Union shall be granted.

III. The Motion to Amend Complaint

Unfortunately, those decisions do not dispose of this matter. This Court must now consider the propriety of granting Ryder's motion to amend its complaint by adding a count for tortious breach of contract including claims for $33 million in compensatory damages and $30 million in punitive damages. In spite of the size of the judgment plaintiff seeks, the Court is predisposed to follow Rule 15's admonition to grant freely leave to amend where justice so requires. However, because defendant has argued that such an amendment is futile in that it does not state a cognizable claim, the Court is compelled by concerns for efficiency to consider the legal merits of the proposed amendment.

A. The Proposed Amendment May Not Be Futile.

The crux of the issue is whether the laws of either Virginia, where the tortious injury allegedly took place, or of Connecticut or New York (one of which states' law allegedly governs the underlying contract), recognize a tort of bad faith breach of contract by an insurer that would support the claimed compensatory or punitive damages. If none if the three states' laws recognizes such a claim, then as noted by counsel for National Union in oral argument, the motion to amend should be denied as futile. If any of these jurisdictions recognizes such a claim, the Court must then proceed to determine which state's body of law governs this matter.

Comparing the laws of Virginia, Connecticut, and New York as to the availability of compensatory and punitive damages against an insurer who tortiously and in bad faith fails to defend or satisfy a claim against its insured, this Court has determined first that Virginia law does not recognize such a claim as capable of supporting punitive damages. In the leading case of Kamlar Corp. v. Haley, 224 Va. 699, 299 S.E.2d 514 (1983), the Supreme Court of Virginia explained that in an exceptional case, an evidentiary showing and a separate count in the complaint alleging "an independent, wilful tort, beyond the mere breach of a duty imposed by a contract," might support an award of punitive damages in an action for breach of contract. Id. at 518. However, the Fourth Circuit in Bettius & Sanderson, P.C. v. National Union Fire Insurance Co., 839 F.2d 1009, 1016 (4th Cir.1988) (involving a third party insurance controversy) and A & E Supply Co. v. Nationwide Mutual Fire Insurance Co., 798 F.2d 669, 676 (4th Cir. 1986) (involving a first party insurance controversy), interpreted Virginia decisions to hold that in a Virginia insurance relationship, liability for bad faith conduct is a matter of statutory law and the common law of contracts rather than of tort law. Considering these binding decisions, it is clear that the alleged bad faith of the National Union at most breaches a contractual duty, and does not constitute an independent tort under Virginia common law capable of supporting a claim for punitive damages.³

By contrast, Connecticut appears to recognize a tort remedy for an insurer's bad faith breach of its duties under its insurance contracts. See Grand Sheet Metal Products Co. v. Protection Mutual Insurance Co., 34 Conn.Supp. 46, 375 A.2d 428 (1977). In Grand Sheet Metal, the court followed the California Supreme Court's landmark decision in Gruenberg v. Aetna Insurance Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (1972), which held that "when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort." Id. 108 Cal.Rptr. at 486, 510 P.2d at 1038. The court in Grand Sheet Metal incorporated in its ruling an additional requirement that the claim be expressed in a separate tort count from the claim for breach of contract. See 375 A.2d at 430. Ryder, in this case, attempts to assert just such a claim, and therefore this Court believes the claim would be recognized by the courts of Connecticut.

The law of New York also appears to go farther than Virginia does by providing for the collection of compensatory damages above policy limits in cases involving bad faith conduct by insurers. See Gordon v. Nationwide Mutual Insurance Co., 30 N.Y.2d 427, 334 N.Y.S.2d 601, 608, 285 N.E.2d 849, 854 (1972). However, bad faith claims against insurers are treated as contract claims instead of tort claims. See e.g. Oppel v. Empire Mutual Insurance Co., 517 F.Supp. 1305, 1307 (S.D.N.Y.1981); Royal Globe Insurance Co. v. Chock Full O'Nuts Corp., 86 A.D.2d 315, 449 N.Y.S.2d 740, 743 (1982). It also seems that although some New York courts are unwilling to call these damages "punitive," see e.g. AFIA v. Continental Insurance Co., 140 A.D.2d 167, 527 N.Y.S.2d 420, 421-22 (1988), there is a punitive intent behind assessing damages in excess of policy limits in egregious contract cases. See Gordon, 334 N.Y.S.2d at 608, 285 N.E.2d at 854 (noting the "punitive nature" and "punitive measure" of damages in excess of policy limits). Finally, the New York cases this Court has reviewed appear to agree that these extra-contractual damages may be assessed only in extraordinary cases, especially those involving injuries to public rights or welfare as opposed to private wrongs. In spite of the fact no injury to a public right has been alleged in this case, Ryder's claim would in all probability be legally cognizable in New York courts, and would not be dismissed at the pretrial stage. See Roldan v. Allstate Insurance Co., 149 A.D.2d 20, 544 N.Y.S.2d 359, 370 (1989) (noting New York courts' "reluctance" to dismiss such claims because of deficiencies in the pleadings).

In light of the contrast between the unfavorable treatment claims of bad faith conduct by an insurer receive in the courts of Virginia, and the respectability they have attained in the courts of Connecticut and New York, it is clear that National Union's proposed amendment seeking compensatory and punitive damages would not necessarily be futile if Connecticut or New York law were to govern the claim. This Court must, therefore, now determine which state's law would properly govern the proposed bad faith count.

B. Choice of Law

The difficulty the Court faces in...